'China faces the 'greatest bubble' in history'

BloombergMar 18, 2010, 03.00am IST

HONG KONG: China is in the midst of "the greatest bubble in history," said James Rickards, former general counsel of hedge fund Long-Term Capital Management. The Chinese central bank's balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at consulting firm Omnis.

"As I see it, it is the greatest bubble in history with the most massive misallocation of wealth," Rickards said at the Asset Allocation Summit Asia 2010 organised by Terrapinn in Hong Kong on Tuesday. China "is a bubble waiting to burst."

China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world-record $2.4 trillion as of December.

The Shanghai Composite Index of stocks jumped 80% last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009.

'MASSIVE STIMULUS'

The World Bank indicated on Wednesday that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation's "massive monetary stimulus" risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing.

"People making comments about bubbles possibly don't have all the facts," HSBC Holdings chief executive officer Michael Geoghegan said in Shanghai on Tuesday. Regulators are in control of the banking industry, and have the ability to curb lending as needed, he said.